Alcatel Lucent's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: Nokia Corporation (NOK)

Alcatel Lucent SA (ALU) Q2 2013 Earnings Call July 30, 2013 7:00 AM ET

Executives

Michel Combes – CEO

Paul Tufano – COO and CFO

Analysts

Kai Korschelt – Deutsche Bank

Francois Meunier – Morgan Stanley

Gareth Jenkins – UBS

Alexander Peterc – Exane BNP Paribas

Sandeep Deshpande – JP Morgan

Achal Sultania – Credit Suisse

Richard Kramer – Arete Research

Vincent Maulay – Oddo Securities

Operator

Welcome to the Alcatel-Lucent First Half Analyst Conference. I leave the floor to Michel Combes.

Michel Combes

Good afternoon or good morning to all of you. I am pleased with Paul Tufano to present you our Q2, ‘13 earnings. Let me start with a quick summary of the quarter that you can find on slide four. Talking about business trends first, we saw an acceleration of revenue growth in Q2, confirming the trend noted in Q1, ‘13 such as North America with a 19% year-on-year increase of revenue at constant rates and for IP with a 26% year-on-year increase of revenue at constant rate as well. Market trends are encouraging with some interesting projects being launched across the world in the U.S. and China. I will discuss more in detail about that later on.

I am also encouraged by the gross margin, which is back to Q2 level and in good progress compared to Q1, with IP Platforms and Managed Services playing a key role here. Talking about The Shift Plan implementation, since June, the 19th Announcement good progress has been made in the implementation of The Shift Plan with the new organization in place, an acceleration of cost savings, some early achievements on the debt and the announcement today of a strategic partnership with Qualcomm.

Looking ahead, we are pleased with this quarter but there is still a lot to be done and especially our cash generation remains weak. We have to and we will maintain a strict and disciplined approach to implementing The Shift Plan across all its dimensions.

Slide five, I want to share with you a preliminary view under the new structure starting formally in Q3. I want to highlight that core Networking confirmed its role of growth driver in the future with an increase of year-on-year revenue of 9% at constant rate. And that in Access we see a confirmation of the transition to ultra-broadband technologies LTE, vectoring, FTTx driving small increase in wireline and wireless access. As a sign of success in exiting some items, if I contrast, we also see a decrease in the revenue of our Managed Services, but I will come back to this later as well.

Slide six, I will now provide you with some elements on our new structure at adjusted operating income level. In core networking the positive impact of ITN platforms is driving the nine points year-on-year increase in operating profit. Regarding Access we have two different items here, the low level of revenue in licensing and the negative profitability in wireless, partly compensated by a good impact in managed services and the good profitability in fixed networks.

Slide seven, going into details by business division, starting with IP Routing, I want to highlight here the very good performance of IP, growing 26% year-on-year constant rate, with growth across all regions; North America leading the trend with a plus 40% growth year-on-year at constant rate, APAC and EMEA growing to a smaller pace, but growing, APAC at plus 18% year-on-year constant rate, mainly led by Japan and EMEA after several quarters of market decline growing at 6%.

We recorded as well two additional wins in the quarter for our XRS core router, one in North America and one in Germany with the world’s largest global internet exchange points in DE-CIX bringing at 10, the total number of wins since the launch of XRS one year ago and more than 20 trials as well ongoing. IP Routing increasing its sphere in our total revenues is having as you can imagine a good impact on our profitability.

Let’s talk now about the IP transport business line, in terrestrial optics things are getting better with a reduction of pace of the decline from minus 15 in Q1 to minus 5 in Q2, thought still negative. In particular WDN is showing a plus 7% growth. Regarding our 1830 Photonic Service Switch it now represent 31% of Optical revenues legacy products representing 25%.

In Submarine we are at a low point in Q2 ‘13 but H2 should start improving, knowing the strong order book in Q2 ‘13. So for the quarter to come we will continue to focus on IP transport in order to have new business offsetting the decrease in the legacy one.

Finally in IP platforms we had good quarter in IMS and in our Motive solutions, trends toward shared data plans for example in U.S., smartphone proliferation all around the world and preparation of voice of LTE introduction mainly in U.S. are creating good opportunities going forward as IMS is obviously needed for the introduction of Voice over LTE.

Moving on next slide to access and first to wireless. LTE technology represents for the first time our largest revenue share in wireless with a plus 22% year-on-year revenue growth at constant rate. CDMA continued its decline and is now representing approximately 20% of our wireless revenue. The Shift Plan and rebalancing the R&D for legacy technologies to next generation technology this led to an increase in R&D spending in the short-term in order to be able to accommodate developments needed in LTE but we expect a positive impact from this in the coming years when we’ll be able to scale down the R&D in legacy.

Turning to Managed Services, which was a big part of our previous performance plan, we have almost completed the restructuring of the business by successfully addressing 14 out of the 15 management contract in the past logically impacting sales in the business division. Year-on-year revenue declined by 13% at constant but also significantly improving profitability by €90 million in H1, 2013 compared to H1, 2012. We have also five new and extension contracts on which as you can imagine we are actually focused on profitability of any new additional that we might take.

Let’s move now to fixed access we see operators refreshing and expanding their fixed access network to bring higher broadband access capabilities. We secured 12 wins this quarter out of which four vectoring and six in fiber bringing to more than 45 the network secured in the last three quarters.

In particular our vectoring solution is clearly ahead of the competitors and is very successful. We have a time to market advantage and it is a success we have to leverage with such technologies like G.fast. We see operators refreshing, upgrading their access network by boosting the performance of copper or investing in fiber technologies and we are of course present on those both routes. Licensing we have as already mentioned H1 ‘13 particularly low but we are taking actions to improve our performance in the quarters to come.

Let’s move on slide nine now to the implementation of The Shift Plan which is clearly the priority of the management team and the actions we implemented. Regarding the organization we announced our top four labels of managements according to the organizational culture we laid out the 19th of June and we’ll complete that the full organization by September in order not to lose in second. The results on delivery office which is let’s say the office which controls all the implementation of this organization is in place and reviews have already started under the Chief Operating Officer to drive and monitor the implementation of The Shift Plan.

On cost reductions we achieved more than 50% of our 2013 fixed cost saving target of 250 to EUR300 million at the end of June with the total fixed cost savings of 175, out of which 120 in Q2. We are obviously very confident to achieve our target. I’m also happy to announce to you today, the collaboration to develop multi-mode small cell base stations that enhance Wi-Fi, 3G and 4G networks to improve wireless connectivity in residential enterprise environments. These next-generation small cell will combine Alcatel Lucent’s proven expertise in small cell applications with Qualcomm’s industry mobile and networking technology to enable ultra-broadband wireless communications.

This is consistent with our willingness to redefine our innovation capabilities going forward and to do that in partnership with partners which can bring us deals, which can bring a financial [legacy] and which can bring us time to market, which is critical when you are in this innovation world.

On the balance sheet between April and July, we [accounted] for 1.2 billion of debt and issued convertible bonds for EUR 630, which is consistent with The Shift Plan and we remain open to debt market opportunities. These actions led to a cumulative reduction of net internet costs of more than EUR40 million for ‘13- ‘14. Still a good start for Shift but clear that all our energy will remain even more focused in the next coming quarters, in order to turn this plan in a successful delivery and to really focus even more on the cash generation.

Let’s now talk slide 10, about fixed cost savings, which we as you know is extremely important to in order to adapt our cost structure to the new environment in which we do operate. Here is a summary of our progress, let me remind you with some figures.

EUR120 million of savings in Q2 ‘13, acceleration compared to Q1 which delivers a €55 million of selling. Savings are main attacking SG&A and our SG&A decreased 12.7% in Europe at constant rate and 5.9% quarter on quarter at constant rate as well. Quarterly savings are obviously not linear, but as you can see on this slide the trend is encouraging.

As I committed to you and as you can see on slide 11, as it was a request from most of you, I will present the bridge between the fixed cost change and the P&L as we can see it in order for you to be able to reconcile the figures. As we said, at constant and normalized variable compensation our fixed cost decreased by €120 million in Q2 ‘13. This has been partially offset by the change in ForEx and variable compensation accruals of €68 million. We expect this figure to decrease next year once condition will be achieved and we will be in a normalized situation.

Let’s turn now to debt re-profiling. We present you here the situation starting 2013, including the secured loan and which is varied, you have the (inaudible) and where we are now. We cleared nearly 1.8 billion of debt which was due between ‘13 and ‘15 and we’re left today with less than EUR450 of maturity until end of ‘15 and cash is toward EUR5 billion.

So before leaving the floor to Paul, what do we expect going forward. Market is definitely moving towards IP and ultra-broadband which are the two key pillars of our strategy and this will continue in H2. We see demand for our IP, WDM platform, LTE and vectoring solutions while the decline in legacy technologies will continue. We will continue to maintain a very strict discipline in implementation of our cross-savings actions at start of The Shift Plan. We are pursuing asset disposals and we remain open to debt market opportunities.

With this I give the floor Paul to comment some of our financials.

Paul Tufano

Thank you, Michel.

What we will do today give you a little bit more color on our financials. If you turn to slide 15, we see our net income as reported. You see we have revenues of EUR3.6 billion and a net income loss of EUR885 million. The two principal drivers of that loss, one is increased restructuring charges at EUR 194 million. The other is an impairment of assets of EUR552 million.

What I would like to do now, is just talk about the impairment that we took in the second quarter. So turning to next page, as you know we took an impairment in the fourth quarter of 2012 and in that impairment we – was under our old organization structure. In January we made a new organization structure in which time we put maintenance in to each of the product division. We did one more test of impairment at that time using the assumptions that were part of the secured loan financing baggage.

At the time of The Shift Plan as you recall we have derisked part of the plan and as part of the derisking we saw in our wireless group some additional impairment activity primarily for the maintenance that we added in January. And so the impairment of EUR552 million is all in wireless, it is primarily as relates to maintenance, goodwill. We have impaired all the maintenance, goodwill in wireless. I will remind you this is the non-cash charge and is a technical impairment analysis that we do any time if we have a triggering event. So that should clarify the impairment we took in the second quarter.

If we turn now to the next slide which is our Q2 adjusted P&L. We did report adjusted operating profit of EUR46 million on EUR3.6 billion of revenues. As Michel indicated when you adjust for constant currency that is positive 3.7% year-on-year growth on revenue and approximately 12% growth quarter-on-quarter both at constant currency and natural rate.

If you see our gross margins we improved about basis points in year-on-year period and 250 basis points over the course of the first and second quarter. If I look at that growth of 250 basis points you know the lion’s share came from primarily increased wireline mix with our IPD division contributing handsomely to that gross margin.

Expenses are down quarter-on-quarter and year-on-year. Michel went through that. So I will not go through that in detail. As I look at the geographic split of our revenue on chart 18, you can see that we were able to enjoy significant growth in North-America year-on-year both AT&T and Verizon were over 10% customers. Europe is down 6% though it is up quarter-on-quarter when you look at it in the first quarter. Asia-Pacific is down 2% and the rest of the world is down 10%.

Turning to the next slide, this is the breakdown of revenue by operating segments under our current organization structure. As you can see the year-on-year and quarter-to-quarter trends are very much similar to what Michel articulated. I will note that in the focused businesses we have our Submarine business under this orientation and it is the majority of the year-on-year decrease. So when we look at the order book we see strong order book on Submarine.

Turning to next slide which is operating income by segment, again under our old segment reporting, the trends again reflect the same trends that Michel talked about in this segment structure. So I will not elaborate further here.

If I now turn to the balance sheet, if I look at the balance sheet some of the major differences are goodwill. You see here a EUR634 million reduction of goodwill over time. That’s primarily attributable to the impairment we took plus some foreign changes. Another thing that I would note would be that shareholder equity, you see has gone down $728 million. A piece of that is – the majority of that’s driven by our net income loss of 85, offset by a positive pension gain of 255 million. If that positive pension gain is reflected in the net pension liability line we see a decrease. And we have seen an improvement in our underfunded status which I’ll talk about in the next slide.

Turning to working capital, working capital at actual rate declined about 31 million. When you actually normalize for budget rate it was about 36 million. If you look at the various drivers we did increase our inventory over the period by about 53 million at budget rate. That’s primarily driven by increase in network build activity primarily in North America. Our receivables were essentially were up slightly, and our payables were up slightly as well, so it’s that the impact on free cash flow for working capital a negative 100 million.

If I turn to the next page which is the cash flow statement, you can see that we reported negative 248 million of free cash flow. As you go through that, you can see the net change in operating working capital of minus 100 million, 98 million on the chart, due to the drop inventory. The other lines of the cash flow statement are in line with our expectations with interest of 58 million, taxes of 21. Cash contributions of 49 and restructuring of 114.

We ended the quarter with EUR 4.93 billion of cash and marketable securities. As we indicated we repaid 1.2 billion of debt at nominal value. We also – We paid at maturity at 764 million of the June put and we issued a new Oceane for 600 million – 630 million that we’ll extend out to 2018.

If I go to our pensions, we’ve seen a significant improvement in the underfunded status of the pensions. You can see that it’s now EUR96 million down over EUR325 million from the period before, and close to 2.1 billion from the year ago period. This is primarily attributable to the fact that the discount rates have increased by over 50 basis points. The discount rates increased and increased in July and August, and therefore the – decrease of liabilities, excuse me, and therefore improves the underfunded status. I will remind you that in the U.S. pension plans which are dictated by receivables we are fully funded in all our U.S. pension plans, and we do not anticipate any funding in the U.S. till at least 2016.

So with that, let me end and we’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from Kai Korschelt from Deutsche Bank. Please proceed with your question.

Kai Korschelt – Deutsche Bank

Yes, sir thanks for taking my question. I have two. The first one was really on the gross margin. I think you already said that we shouldn’t necessarily extrapolate the Q2 gross margin, but if you look at the U.S. for example, I mean, it looks like the gradual shift to LTE functionality and capacity is probably only in the very early stages. So I’m just wondering, why the gross margin cannot stay at this level on a more sustained basis. That was my first one. The second one was really on Shift If you could maybe provide an update in terms of when we should start to expect, maybe on acceleration in the OpEx cuts and potentially more benefit to the gross margin. I mean, would this really be more of a Q4 event, H1 next year? I’m just trying to get a sense for the timing of the new savings that should come on top of what you are currently seeing. Thank you.

Michel Combes

Well, thank you. Your first question concerning the gross margin. As you know we do not guide on a quarterly basis. So I don’t intend to do that. You know that our plan is to increase the gross margin from the 30% level reached in 2012 to several points higher in 2015.

We have different levers to achieve this by increasing the product mix with higher share of IP routing and IP platforms. And as I have already referred to that it was one of the main impact of let’s say the increase that we have seen in Q2. Second lever is by recovering historical level in terrestrial optics with our 1830 platform and higher share of 100-gig line card shipments we have seen that we are moving in the direction but we are still negative in terms of revenue growth. So we are not yet where we should be, from an optical point of view.

By being more selective in the ONC contracts we signing in fixed network because that this piece which has an negative impact on our gross margin compared to the rest of our products and also by let’s say playing on different levers by being more efficient with our logistics and supply chain and consolidating warehouses and purchasing locations which is part of the Shift Plan in terms of cost restructuring by improving our bill of materials through reduction of product complexity and negative products, which is also a big part of Shift and finally by increasing the quality of our products.

So going forward, yes gross margin will increase from 2012 levels in the short term, that’s so that I said, we stated that we should not extrapolate specific quarterly levels as products geographical mix may change from one quarter to another one, like U.S., North China for example. So that’s the reason why let’s say we made the statement having in mind that’s the trend in between 2012 and 2015 is to drive for a sustainable improvement of our gross margin.

On your second question concerning Shift, as you see Shift has been launched on the 19th of June. So we are still very early days even if in second quarter we had started even before the full launch of Shift to orchestrate some additional cost reductions. That’s what translates in OpEx reductions of EUR120 million in Q2 compared to EUR55 million in Q1. So which is a reflect of let’s say the additional initiatives which have been taken and which give me a strong comfort that we will achieve our target for the year. Just remind you with the fact that initial target for the year when we entered the year was a EUR200 million savings that we raised this target to 250 to 300 when I announced the Shift Plan. We delivered first half 175 so I am very comfortable to deliver the new target. Of course let’s say the additional measures that we will take in second half will have impact in the years to come.

Last comment that I could make because it’s also related. we are trying to upfront as much as we can the cost reductions which translate in restructuring cost which have increased in Q2 and that you should foresee as increasing in H2 in order to allow us to reduce our cost in let’s say the quickest manner.

Kai Korschelt – Deutsche Bank

Okay. That’s very helpful. Thank you very much.

Operator

Thank you. The next question comes from Francois Meunier from Morgan Stanley. Please proceed with your question.

Francois Meunier – Morgan Stanley

Yes, thanks for taking my question. So the first one is really about the end markets and maybe what’s going on? I can see in your press release that your order backlog has increased in Optics and in Submarine as well, IP looks at very good quarter. So is it just the end market, is it market share gain or is it basically customer confidence being restored by the Shift Plan? So this is my first question. The second question is actually rebounding on the previous question, the 250 million to 300 million cut in cost, does that exclude the benefit 68 million you were talking about in the OpEx bridge, which is really bonuses accruals? That’s my second question.

The third if I may is about the VoLTE rollouts which have started in Q2. is it like a Q2 one-off or is it going to continue with Verizon in the next quarter? Thank you very much.

Michel Combes

Your first question on let’s say market versus street dynamics. I guess that it is probably fair to say that the market has shown a good traction in H1, led by North America, China and parts of (Scala). North American telecommunication markets continue to be in a rapid cycle of investments driving growth and all U.S. telecommunication service providers are proceeding rapidly with LTE and pursuing new growth avenues. I guess that CapEx was worth more than 20% for this let’s say U.S. players.

Momentum is building in China and parts of Scala with major ultra-broadband roll outs in process and about to be launched, the largest being China Mobile plan to have more than 200,000 LTE active base stations by the end of the year, that’s their plan. And of course Europe continues to struggle big with growth and is confronted with an restructuring. So I would say that we have benefited from these macro trends due to the right geographical exposure of Alcatel-Lucent in those different regions.

I would add that on top of that in the products that you have referred to I believe that we have a nice portfolio set in IP for example which has been built in the past two years. So we are taking the benefit of our portfolio which is well structured to get some expectations and there is probably no doubt that will save some kind of trust has been also restored with some of our customers in the past few months based on the plan we have presented on the 19th of June. So that’s probably a mix of all of that. Again as far as the macro situation is concerned we have to monitor that very carefully for the next coming quarters whether let’s say the U.S. growth will be sustainable as it has been let’s say as what we have seen in H1 and also to see when China is really willing to deliver in between H2 and beginning of 2014.

So that’s for let’s say marketing shift. Then on the OpEx side so what I had said is that we have this so let’s say 120 million OpEx reductions, which is offset by 68 million coming from ForEx change in between the two years and also difference of accruals on variable compensation as in 2012 we reversed accruals and in 2013 we took some accruals. So that’s the reason why what you see in the P&L is 62 and not 120 and that the clarity that I wanted to give you, the slide which I presented to you with let’s say the bridge in order to be very consistent and very clear on what we are trying to achieve.

So then your third piece voice over LTE. So voice-over-LTE is about to be really commercially launched by the main operators in the U.S. So what we’re seeing right now is that those are operators are expecting to rollout the investments mainly rolling out the hardware equipment in the network in order to be able to accommodate the launch of voice-over-LTE. Then that will allow them to really launch it from a commercial point of view and the business model is based on software revenue which is –which will be based solely on a customer by customer basis.

So meaning that let’s say when we will see some uptick in terms of voice-over-LTE customers we should see an uptick of revenue in voice-over-LTE. So it’s not a one-shot. The one shot will be hardware which has been installed in the network but it will give revenue stream for the next coming years as soon as voice-over-LTE will spread among the users.

Francois Meunier – Morgan Stanley

Okay it was (inaudible) thank you Mr. Combes.

Operator

Thank you. Your next question comes from Gareth Jenkins from UBS. Please proceed with your question.

Gareth Jenkins – UBS

A couple of quick questions. I just wanted in terms of your legacy areas for the margins now they are kind of below average bridge to CDMA and I wondered if could give us sort of CDMA feel year-over-year so well (inaudible) on the track on the profitability? And secondly I just wanted on sort of the investment programs by Qualcomm I wondered if this is the first step with multiple partners joining over time and what sort of partners those would be and what percentage of the company (inaudible) these types of partners? Thank you.

Michel Combes

In terms of the first part of your acquisition we obviously don’t disclose margins, product, products I guess that in earlier calls we have said that for the wireless U.S. specifically referring to the level of margins in between legacy and new products, were now about the same but I mean that we don’t intend to report on the strategic margins per product.

On your second point concerning Qualcomm so when I presented The Shift Plan I said that our intent was to establish partnership technological partnership with a few selected players in between three to five we’ll see exactly what will be the exact outcome. Having in mind that I am not focusing the content of those partnerships, rather than it is a (inaudible) of partners and in terms of what we are looking for is partners which can be focused on the areas where we believe there is a growth potential. And as I said during the Shift Plan presentation that small cells was obviously a good candidate to other partnering and as I said earlier, partners which bring scales and capabilities, partners which can bring financial resources and partners which can bring as well time to market because that’s where you can make the difference in the marketplace vis-à-vis your customers.

So this one let’s say the first one Qualcomm we obviously intend to do the same with a few other names of the industry in the next coming quarters in due course. And what I said in that terms of ownership or those let’s say partners together might represent likely above 5% of our capital structure meaning that again the driver is really first the industrial logic. The second driver is really the resources that can be put on the table in order to be successful. And the third is investments in Alcatel-Lucent when it makes sense for the partner because of the first is aligned interest of the two parties even if it remains small.

And second I guess that it conveys trust of all the other people and Qualcomm in particular, in that case in the future of Alcatel-Lucent in that space being the right partner to develop small cells leveraging all what has been done in the past by Alcatel-Lucent in the past two years around light radio.

Gareth Jenkins – UBS

Thanks very much.

Operator

Thank you. Your next question comes from Alexander Peterc from Exane BNP Paribas. Please proceed with your question.

Alexander Peterc – Exane BNP Paribas

Thanks for taking my question. I would just like to clarify what exactly happened in access. You have a flat revenue but the deterioration in operating profit from breakeven to minus 4% so which area exactly is deteriorating then. I mean I know that’s offset by a very good performance elsewhere but just in the specific area like in the sense what’s deteriorating. And just briefly if you could touch upon the working capital. Should we expect more consumption of cash at this level in the coming quarters how should we model that? Thank you.

Michel Combes

So in Access I guess that I mentioned the fact that we had two negative impact and one positive. So two negative which is on one side is a patent sales which are lower than what we generated last year and that obviously this come with very high gross margin. And let’s say wireless which is negative and offset by improvements in the fixed area which see margin growing and based on let’s say that nice growth rate that we are generating on our VDSL and vectoring business which is growing 50% year-on-year. So that let’s say the way the margins is evolving in this access area. As far as working capital is concerned I guess that what you know is that we have flagged one impact – free cash flow rather than the working capital we have flagged one major impact which will occur in the quarters to come which is restructuring cost which I expect to see increasing in the next coming quarters because let’s say I wish to accelerate the restructuring of the [inaudible].

So which means that we have flagged that we might go up to EUR700 million of restructuring cost which will impact our cash flow not working capital. The working capital let’s say level I guess of course it depends on some large rollouts going forward and you are aware for example of the TD-LTE rollout in China which might require some inventories build up in order to be able to deliver what will expected by the customers so that maybe what might have some impacts on the working capital going forward.

Alexander Peterc – Exane BNP Paribas

Exactly, thank you very much.

Operator

Thank you. The next question comes from Sandeep Deshpande from JP Morgan. Please proceed with your question.

Sandeep Deshpande – JP Morgan

Yeah, hi. Thank you for the question. My question is regarding this partnership, you have announced a partnership with Qualcomm. Can we understand what this partnership will mean for Alcatel-Lucent given that I mean for the past couple of years we have heard from the company that we small cell technology is market leader, why you need to now have a partnership to improve the technology when it has been a market leader for the past couple of years?

Secondly, in terms of reconciling your EBIT with your cash flows if you consider couple of years from now on The Shift program is done, where you see at what level of margin that you see a breakeven on the cash flow that you will have. So that what EBIT margin do you see at a breakeven level for a free cash flow? Thank you.

Michel Combes

So, on your first question I guess what we have said and which is being true is that we have been leader in the small cells market in the past, mainly in 3G area. With our femto cell products for residential and with our 3G Wi-Fi small cells for the enterprise market. And so what we intend to do with Qualcomm is to migrate into new multi-technology platform meaning 3G, 4G Wi-Fi which is a key request from the customers which will cover both enterprise first and residential second and which might even later on cover the natural sales space where we already have our own 4G products.

So what we expect from this partnership is to be able to move quicker in that space and let’s say towards the best in class product. Qualcomm is coming with a very efficient chipset mainly in terms of energy consumption so which should give us a nice lead in that space as we have able to be built in the enterprise. So my key extension is that I am expecting that we would be first to move in the multi technology small cells and so that it could give us the opportunity to continue to grow let’s say in that space.

For your second question as you know and as I have presented in this plan we don’t give any group targets. We precisely reported on what we intend to achieve for the IP business, which is around the growth, the revenue growth that we intend to deliver and the level of margin that we intend to raise and the turnaround from the cash perspective that we intend to generate in our access business.

So I am not, let’s say going to change those target which I have given less than one month ago.

Sandeep Deshpande – JP Morgan

So can I ask between the second question in a different way. In the sense that your net debt has been increasing over the last couple of quarters, you do have growth cash on the balance sheet. The issue is with the negative cash flow that you will have over the next couple of quarters, if net debt will continue to increase, on what level of net debt do you think that the company carry given that the customers have reason to be concerned with the level of net debt the company has, if suppose they were to be a for the future downturn in the economy or with the market? Thanks.

Michel Combes

Yes, that’s when we disclose the Shift Plan, we’ve been also very clear on the financial piece of let’s say the Shift Plan, you remember the most likely the 2-2-2. So the first 2 billion made of an improvement in our operations plus 1 billion of asset disposals commitment which should allow us to delivers the Shift Plan without let’s say with the same level of cash entering into plan and exiting from the plan, so cash neutral of course. So if when we look at it from bunch of entry to bunch of exits. So that’s let’s say is the first piece, the first answer to your question.

Then the second as you know, we are facing some maturity issues from the debt perspective. And so there we have started to implement debt restructuring that I was committed to do and the third, 2 billion was to say that by the end of The Shift Plan, our intent is to reduce the level of debt by an absolute 2 billion amount which will be used either for additional asset disposals and/or capital increase. So, I guess that it is the answer to the question that you are raising which has been presented in the 19, which has been also obviously presented and explained to our customers for them to be comfortable with the financials of the company and the way we are going to manage this transaction.

Sandeep Deshpande – JP Morgan

Thank you.

Operator

Thank you. The next question comes from Achal Sultania from Credit Suisse. Please proceed with your question.

Achal Sultania – Credit Suisse

Thanks, couple of questions, first on the OpEx side, if I remember I think you mentioned there was a headcount reduction of about almost 5,500 people during the last quarter. I’m just wondering are we already started seeing the benefits of that flowing through the P&L or is it something that we’re going to see more in the second half of this year. That’s my first question.

And then the second one on the managed services business, obviously we’ve seen a lot of improvement in profitability in the first half of this year. We are almost close to breaking level in that business. Is it fair to assume that this business can make money longer term and if yes, can you give us some sense or what would be a reasonable level? Thank you.

Michel Combes

For the first piece, yes it’s fast to let’s say assess that what is driving OpEx cost reduction is obviously many coming from SG&A, as I had mentioned earlier on. And so SG&A means that it comes mainly from reduction in terms of number of employees within the company. So which have kicked – which will kick in Q4, 2012 and which we’re accelerated in H1, 2013.

So which means that we have obviously in Q2 already the impact on what was achieved in Q4 last year and in Q1 this year and we will see in the next coming quarters some impact on the additional departures that we are managing and generating right now. So that’s let’s say the answer to your first question.

The second that true that let’s say which we have committed was to come back to breakeven on these managed services contract that what has been achieved in Q2 and we intend to let’s say become positive in the next quarters, of course that is service business. So it will remain a business with low margin but positive one in the coming quarters.

Achal Sultania – Credit Suisse

Thank you. Michel I just have a follow up in terms of headcount, can you give us some color as to where your headcount is as opposed to where it was versus last year?

Michel Combes

Since the beginning of the year the total account, the total number of IP accounts have decreased including managed services by 7,500, so first half.

Achal Sultania – Credit Suisse

Thank you.

Operator

Thank you. The next question comes from Richard Kramer from Arete. Please proceed with your question.

Richard Kramer – Arete Research

Thanks very much. We saw some big jumps in a number of U.S. customers, notably one that was up by over 50%, Michel can you give us any sense of a visibility you have about spending maybe not beyond next quarter or two but into 2014, how privy are you roadmaps there and how confident are you that that spending is sustained? Second can you comment at all whether you see IPD facing increased competition in second half ‘13 and beyond given that some of your principal competitors will be having refreshes as of their product ranges? And third, we heard about the promise but the disappointment of IP licensing for many, many quarters now. Can you talk about structurally what the problem is in monetizing this mass patent portfolio when so many others with large patent portfolios seem to be generating far higher levels of income? Thanks.

Michel Combes

So three questions, so first U.S. customers. So I guess that of course as you can imagine we are actually close to the American customers. Lucent has been close to those customers for many years. So we try to add product portfolio which is best suited for the needs of our customers and when there are gap to close those gaps functionality point of view. I guess I think the different product lines that we are delivering to them whether it’s wireless, wireline or IP we have today a nice set of products, of course let’s say they can be some let’s say gaps in terms of functionalities between what they will, what they could would expect and what we are ready to deliver and that’s the reason why decided to refocus our R&D on those limited areas in order to make sure that we are best in class in IP and in ultra-broadband access.

So that as you can imagine something that we let’s say review on a permanent basis with U.S. based customers. They are being clearly driven by transition to a full IP network. So we are quite let’s say consistent with that. The earnings being driven by the explosion of data traffic, meaning ultra-broadband access and whatever it’s FTTx and/ or LTE and small cells, because small cells is driven by the U.S. right now in terms of roll-outs and we are working with our customers there. And last but not least also the move to the cloud and the actualization of their let’s say platform on which we are also working very closely with them, leveraging our product portfolio and mainly our cloud based asset which is a middle ware in order to ease this transition to actualization.

So that let’s say answered your first question, in terms of consistency of our roadmap with customer expectations. In terms of IP routing clear, that let’s say we are facing strong competition and which is IC toward strong competition – I guess that we have a nice portfolio of products with very specific features, such as for example with a fact that we use the same platform from edge to core to data centers which allow us also from a management point of view to use the same management tools. So which gives us some quite good advantage in terms of total cost of ownership for our customers compared to some other of our competitors which have different platforms.

Second I guess that everyone recognize that our platform are well and probably best in class and even with the new products which have to come I guess that we will remain extremely competitive from a capacity energy consumption and all that stuff, but obviously that means that we have to remain extremely focused on innovation and that also a reason why and what you have seen in what I had presented you Shift Plan that we intend to increase our R&D spending in IP routing because obviously we wish and we want to remain a leading player in that space and continue what we have done in the edge area and we are and to expand to the core area but again we are expecting a lot our competitors which are strong and which are also innovative.

As far as licensing is concerned, as you know last year we tried let’s say and we leveraged an external in order to let’s say manage the licensing on ODS, with the complete exclusivity to manage it. We didn’t deliver the results that we were expecting to get. So we decided and we strengthened in the context of Shift Plan to leverage that within the company and to manage it on our own. We have recruited some of the best talents in order to do that. We have changed our mindset from a defensive to a more offensive type of mindset in that space, clear that we have a strong portfolio of patents and we intend to momentarily build in the next coming quarters but it takes some time in order to review this as we had stopped it when we had elected to give this let’s task to an external pattern so that’s where we stand.

Last it’s key as well that there is may be less in these let’s patent area we are then what we again asking three years ago when some new players were really extremely keen to get as many patents as they can in order to let’s say fights against newcomers or for the newcomers to fight against existing comes in the mobile industry but all in all I guess that today we have now a strong platform which is there it will still take of time to increase that but I am confident that we will review with a nice trend in terms of patent monetization.

Richard Kramer – Arete Research

Okay. Thanks

Operator

Thank you. The last question comes from Vincent Maulay from Oddo Securities. Please proceed with your question.

Vincent Maulay – Oddo Securities

Thank you. Two question on Optics and fixed access. On Fixed if can extrapolate optic with (inaudible) and then we will grow strongly in H2 after a minus 5% in Q2? And in fixed access do you contend that sales momentum decreased only 3% growth in Q2 is linked to margin improvement to more selectivity?

Michel Combes

I guess in Optics and I guess that’s the name of the game is growth in the WDN space mainly driven by 1830 products and also out of which we the one – so which is nicely growing in Q2, WDN was growing at plus 7% partially offsetting the decrease in legacy. I guess that in Q1 was minus 15%, in Q2 was minus 5%. So obviously our goal of target is slated to reach positive territory at one stage in the next coming quarters which should be able to offset with the growth of new platforms, a decrease in legacy, so that’s let’s say the answer of your first question.

Second the 3% was for the total or just for the total of just for 4G, network so I guess as we as have said in fixed networks so we are mainly obviously focused on profitability in that business, but that’s too let’s say we have right product today in our portfolio and that as there is clear willingness of the customer to refresh their fixed networks, leveraging both cyber and GSM and leveraging the new technology that we have, implemented in DSL such as vectoring.

So I expect the growth to continue in second half of the year as we have already positive growth this first half of the year.

Vincent Maulay – Oddo Securities

Thank you.

Michel Combes

Okay. So I guess that’s the end of this call. So again thanks for having been available for this call. Hope we have answered to the questions that you had and obviously Combes Michel remains at your entire disposal for any additional questions that you might you have on what we have presented today. Thanks and bye.

Operator

Thank you this concludes. Alcatel Lucent’s first half analyst conference. You may now disconnect.

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